AER & APR Comparisons

PaulD

Hi

Is there a way to compare AER rates with APR?

I have been looking at a savings account with the abbey who will pay 6.5% gross p.a. AER if you sign a standing order for 12 months.

That's fine for money I can afford to save, but I thought that if I could borrow money cheaper than that, then I could 'save' it too and pocket the difference.

But how can I compare when loans are in APR and savings are in AER?

Thanks

Reaper

APR is best thought of as a fictious standard rate so you can compare different products. It is unhelpful if you are trying to work out interest payments.

As a rule you will find loans cost more than savings. That is how banks and building societies make their money.

In the case of the Abbey account remember:
1) The 6.5% figure is before tax. I think the net figure is more like 5.2% (more or less depending on the level of tax you pay).
2) It is a regular premium policy. It is no use borrowing a lump sum and drip feeding it into the Abbey account - you won't be earning the full rate on your money all year, but you will be paying full rate on the loan.

There is only one way this can work and that is doing credit card SBTs (super balance transfers). However it takes some effort on your part and attention to detail or you will come unstuck. Read the articles on this on the main site and peoples experiences in the credit card forum.

PaulD

I have tied up all the credit card debt I am willing to at the moment, so I don't want to do a SBT for that. I have some @ 0% and another card for 'just in case'.

You are quite right, the net AER is 5.2%

And as for the drip feed...

I was planning on putting the money into a reasonably decent saving account which is linked with my current account. That way I would earn interest (about 5% AER gross) on the lump sum whilst I was transferring the monthly amount into my current account to feed the higher interest saving account.

I am aware that loans normally cost more than savings, but this did appear to be a decent rate, and the loan companies are fighting for business at the moment, so I thought, maybe...

Reaper

Ah - it is always hard to know where to pitch an answer as I have to guess how financially savvy you are.

You are right in that drip feeding would help. I skipped that to keep things simple. Remember of course that the 5% gross you quote is gross! Best to work with net figures at which point the proposition becomes less attractive.

A cash-ISA would be a better bet if you haven't already used up your limit. Indeed an Abbey postal ISA (for example) pays 5.35% - that is more than the net rate on the Abbey regular savings and it means you would not have to bother with drip feeding.

However even then I would be surprised if you could find a loan which costs you less than you can earn in a savings account without doing an SBT. But if you do - let us know!

Robert_Sterling_3

IMHO APRs on mortgages are not very helpful whereas on straitforward loans they are.
I wont bore you with the details now.
I might bore you with the details another day

Try this

A tally man comes round to a house and lends the tenant 50 pounds.
The tenant agrees to pay it back with inteest by making 11 weekly payments of £5.
What is the APR on this loan?

Meanwhile back to the topic in hand.

The only loan I know where this certainly works is money from the Student Loan Company put into a Mini Cash ISA.